Will I inherit my partner's debt when I go into business with him?

Elaine Pofeldt is a journalist whose articles on entrepreneurship and careers have appeared in Fortune, Working Mother, Money and many other publications. She is a former senior editor at Fortune Small Business magazine and an entrepreneur herself, as co-founder of 200kfreelancer.com, a website for independent professionals. She writes "Your Business Credit," a weekly column about small business and credit, for CreditCards.com.

Dear Your Business Credit,
I am
planning to become a partner in a business with someone who has been running it
for several years. He has built up some credit card debt to pay for business
expenses. Will I become responsible for his debt once I become an owner? -- Worried

Dear Worried,
Great question.
If more business owners looked into issues like this before going into business
together, there would fewer frayed partnerships.

I assume that
you are asking about this because your partner took out a small-business
credit card in the name of the company. Many people don't know that these cards
are usually treated like personal cards by issuers. The individual signing for
the card is ultimately the one who is responsible for the charges, even if it has
the business's name on it.

If you don't
become a signer on your partner's credit card account, you generally will not
be held responsible for the charges in a case like this, says Nina Kaufman, an
attorney who works with many small-business clients. "But if there is any
concern," she adds, "it would be worth speaking to the credit card company to
confirm the policy."

When you
call the issuer, ask what kind of liability someone must assume to get the kind
of card your partner has. On some small-business cards, the cardholder takes on
"joint and several liability," meaning the cardholder and the business share responsibility
for the debt.

Under such
an agreement, the card issuer has the right to pursue both the cardholder's
personal assets and those of the business if the account is delinquent, says Stephen Furnari, an attorney
based in New York City who works with many small-business clients. That could
mean going after your partner's assets -- or those of the business,
including any that you own together. (Your home, however, would not be at
risk, since that's a personal asset that belongs to you).

Likewise, if your partner defaults on a card with joint
and several liability, both his personal credit score and the company's
business credit score will suffer. Your personal score should be insulated,
though, as long as your name is not on the account.

Before you
negotiate your partnership agreement, it's a good idea to talk with a seasoned
attorney about the terms. It's possible to draft it in a way that gives you
protection from your partner's debts.

"A new
partner would have the right to say, 'I will not be responsible for X, Y and Z
debts or obligations of the company,'" says Furnari. You could spell out that your partner must pay for certain expenses out of his share of the company's sales or profits.

You could also gain protection by negotiating
a clause under which your partner agrees to indemnify you if a creditor pursues your
partner for debts. "It would be a provision within
a partnership agreement," says Kaufman. This could come in handy if, for
instance, your partner stiffed someone a year ago, and that person comes after
you now.

Once you enter
the partnership, open your own small-business credit card, rather than joining
your partner's existing cardholder agreement, advises Furnari. "If you join the credit card
account, you have liability to the extent that you are the guarantor," he says.

Elaine Pofeldt is a journalist who specializes in entrepreneurship and careers, contributing to publications such as Fortune, Money, Working Mother and many others. She is a former senior editor at Fortune Small Business magazine and an entrepreneur herself, as co-founder of 200kfreelancer.com, a website for independent professionals.

Published: April 8, 2013

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